Apartment Bubble Inflating Fast

Housing construction numbers for September were "blowout" and "smashed consensus, " according to analysts who follow the sector. Single family starts rose 11 percent from August and are up nearly 43 percent from a year ago. This from the depths of the housing recession.

Multi-family starts and permits, however, garnered a different headline: "Headline Risk as Data Cross 10-year Averages, " came the report from Cantor Fitzgerald.

Building permits for multi-family buildings, which means five units or more, and which will be rental buildings, not condos, jumped 93.4 percent from a year ago to 323, 000, which is above the 10-year average of 296, 000.

"While the silver lining is good news for the broader 'housing recovery, ' the elevated permitting activity in the 5 unit segment may set off alarms in apartment-land, " write David Toti and Gaurav Mehta in the Cantor report. "We expect the multifamily REITs could be under pressure today."

These include Equity Residential, Avalon Bay , Apartment Investment and Management, UDR and Mid America Apartment Communities to name a few.

They offer the caveat that the group has been underperforming of late and that fears around supply are already priced into current valuations. But it all begs the question, as single family home building recovers, are investors throwing too much cash at new rental apartments? This new construction won't come on line for at least two years, when housing may be surging again.

In order to answer the question, we need to put a few things in perspective about these total housing starts stats:

Peter Boockvar of Miller Tabak: "At a starts level of 872, 000, it comes close to matching the level of starts at the depths of the 1991 recession when starts fell to 798, 000 and before that, starts bottomed at 837, 000 in the recession of 1981. This of course is not adjusted for population growth where we had about 250 million people in 1991 and 225 million in 1981 versus 310 million today."

The bottom line is we're up, but we are up from the very bottom, so these big single family starts percentage jumps don't mean that we are anywhere close to even normal times. What's driving the starts? Demand, plain and simple.

"It is underlying demographic demand that is finally starting to kick in, " notes Patrick Newport of HIS Global insight, citing an annual US population increase of about 3 million and an annual household increase of 1.1-1.3 million (historically). So if demand is growing for single family housing, does that necessarily mean it is all being pulled from multi-family rentals? Maybe not.

"There is still a tremendous amount of demand for apartments, " says Mitch Roschelle of PWC. "The supply side of the equation is a different story, there's clearly been a run-up in building permits and the projections of growth in supply continue to be strong, however, the question becomes is there too much risk of overbuilding? If you look back at the last several overbuilding cycles that we've had, whether it be the one after the S&L crisis or the one from the 90s or the one from this decade, we really haven't been a situation where we've overbuilt multifamily in the last 6-7 years, so we don't have an excess of supply, and we don't have an excess of financing to fund future growth in supply."

PWC, which put out its 2013 forecast today, does not see overbuilding risk. Despite the recovery in the single family housing market, there are still many Americans who cannot afford to buy a home and/or cannot qualify for today's mortgages due to impaired credit. The worst of the housing crash may be over, but the scars are not yet healed, both fiscal and emotional. The prime demographic for home buying, those in their 20s and early 30s, are still seeing homeownership is as risky. Either that, or they don't have the down payment or the credit scores to get in the game.